Petroleum Report: Crude Oil Rises, Despite Inventory Build (USO, OIL, DBO, UCO, DTO, SCO, OIH, ERY, ERX)

Sumit Roy:  The U.S. Department of Energy reported this morning that in the week ending May 20, 2011, U.S. crude oil inventories increased by 0.6 million barrels, while gasoline inventories increased by 3.8 million barrels, distillate inventories decreased by 2 million barrels and total petroleum inventories increased by 6.8 million barrels.

Crude oil prices rallied after the report, with Brent nearing $115/barrel, while WTI briefly surpassed $101/barrel. But recent price action does not seem related to these inventory movements.

Instead, traders seem more focused on yesterday’s bullish forecasts from analysts at Goldman Sachs and Morgan Stanley. Both firms foresee Brent crude reaching $130-140/barrel next year, which is considerably higher than it trades currently; prices will rise, they argue, thanks to ongoing Libyan supply disruptions and still-strong demand growth in emerging markets.

Shifting back to the latest EIA report, last week’s large increase in total U.S. petroleum inventories sent the surplus versus the five-year average higher by about 5 million barrels to 19.1 million, or 1.8 percent.

At the same time, the crude oil inventory surplus also increased by over 3 million barrels to 25.4 million barrels, or 7.4 percent, above the five-year average.

Normally, we see crude inventories begin a long seasonal decline starting around this time of the year.

Once again we see mixed movements in product inventories; gasoline inventories increased counter-seasonally, while distillate inventories fell counter-seasonally.

Gasoline inventories are now back above the five-year average, thanks to surging imports and rising refinery production. Depressed demand isn’t helping matters.

Conversely, distillate inventories are falling swiftly and are now only 11.1 million barrels, or 8.6 percent, above the five-year average.


U.S. petroleum demand rose for a second week in a row, though this is due more to a seasonal uptick than any lasting change in the trend. Indeed, on a four-week rolling basis, total demand is down a substantial 5.3 percent year-over-year.

On that same basis, gasoline demand is down 2.1 percent, while distillate demand is down 3.9 percent.


Crude oil imports rose by 0.7 million barrels per day from last week, as refineries sought more oil amid the seasonal ramp-up in demand.

Even so, over the last four weeks, imports have run about 0.9 million barrels per day below what they were at this same time last year. Separately, we saw a huge spike in gasoline imports last week.

It’s plausible that these imports were ordered weeks ago as a contingency plan against any refinery disruptions from the flooding of the Mississippi River. Fortunately, after flood waters were diverted through the Morganza Spillway, those disruptions did not materialize.

Refinery Activity

Refinery utilization spiked higher to 86.3 percent from 83.2 percent, as refiners continue to ramp up for the summer driving season. Gasoline production moved to 9.3 mmbbl/d from 9.1 mmbbl/d, while distillate production rose to 4.3 mmbbl/d from 4 mmbbl/d.


U.S. crude oil production edged below 5.6 mmbbl/d for the first time since March, but production continues to stand near the highest levels since 2004, thanks to surging output in unconventional oil plays.

Inventories at the NYMEX delivery point in Cushing, Okla. were essentially unchanged at 40 million barrels, or 73 percent of the EIA’s estimate of capacity.

But overall, Midwest inventories continued to decline, falling 1.3 million barrels to 102.4 million barrels, or 88 percent of estimated storage capacity.

Front-month WTI calendar spreads were little changed week-over-week at -0.46. Meanwhile, West Texas Intermediate’s discount to Brent expanded from $11.76 last week to $13.89, suggesting that the market does not see a sustained decline in Midwest/Cushing inventories.

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Related Tickers: United States Oil (NYSE:USO), iPath S&P GSCI Crude Oil (NYSE:OIL), PowerShares DB Oil (NYSE:DBO), ProShares Ultra DJ-UBS Crude (NYSE:UCO), PowerShares DB Crude Oil Dble (NYSE:DTO),  ProShares UltraShort DJ-UBS (NYSE:SCO),  Oil Services HOLDRs (NYSE:OIH), Direxion Daily Energy Bear 3X Shares (NYSE:ERY), Direxion Daily Energy Bull 3X Shares (NYSE:ERX).

Written by Sumit Roy From Hard Assets Investor (HAI) is a research-oriented Web site devoted to sharing ideas about hard assets investing. The site has been developed as an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures and gold (the three major components of the hard assets marketplace). The site will focus on hard assets investing without endorsing or recommending any particular investment product.    

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